U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-28083
NEXT GENERATION MEDIA CORP.
---------------------------
(Exact name of Company as specified in its charter)
Nevada 88-0169543
------ ----------
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7644 Dynatech Court, Springfield, Virginia 22153
------------------------------------------------
(Address of principal executive offices) (Zip Code)
Company's telephone number: (703) 644-0200
--------------
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
As of September 30, 2007, the Company had 12,373,397 shares of common stock
issued and outstanding.
TABLE OF CONTENTS
Page
Part I - Financial Information F-1
Item 1 F-1
Condensed Consolidated Interim Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Financial Statements F-8
Item 2. Management's Discussion And Analysis of Financial
Condition And Results Of Operations 3
Item 3. Controls and Procedures 7
Part II - Other Information 7
Item 1. Legal Proceedings 7
Item 2. Changes in Securities And Use of Proceeds 7
Item 3. Defaults upon Senior Securities 8
Item 4. Submission of Matters To A Vote Of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports On Form 8-K 8
Signature
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Table of Contents
Page
----
Condensed Consolidated Interim Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Financial Statements F-8
F-1
NEXT GENERATION MEDIA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ASSETS
(Unaudited) (Audited)
September 30, December 31,
2007 2006
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 211,358 $ 181,196
Accounts receivable, net of
uncollectible accounts 458,148 166,325
Inventories 72,440 97,434
Employee loans and advances 125 1,883
Prepaid expenses and other current assets 70,318 25,103
----------- -----------
Total current assets 812,389 471,941
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 1,236,672 1,143,943
Furniture and fixtures 38,757 38,757
Leasehold improvements 107,300 107,300
Computer equipment/software 384,839 329,917
Software development 411,391 411,391
Vehicles 9,200 9,200
----------- -----------
Total property, plant and equipment 2,188,159 2,040,508
Less: accumulated depreciation (1,136,893) (973,071)
----------- -----------
Net property, plant and equipment 1,051,266 1,067,437
----------- -----------
OTHER ASSETS:
Goodwill 951,133 951,133
Investment in Dynatech, LLC 1,750 --
Deposits 41,200 41,200
----------- -----------
Total other assets 994,083 992,333
----------- -----------
TOTAL ASSETS $ 2,857,738 $ 2,531,711
=========== ===========
--------------------------------------------------------------------------------
See accompanying notes and accountant's review report
F-2
NEXT GENERATION MEDIA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited) (Audited)
September 30, December 31,
2007 2006
----------- -----------
CURRENT LIABILITIES:
Obligation under capital leases,
current portion $ 102,046 $ 46,871
Notes payable, current portion 17,513 25,317
Line of credit 150,000 100,000
Accounts payable 328,214 203,670
Accrued expenses 150,616 127,891
Pension payable 61,264 34,264
Deferred rent 63,298 --
Deferred revenue 26,133 --
Sales tax payable 8,825 1,338
----------- -----------
Total current liabilities 907,909 539,351
----------- -----------
LONG TERM LIABILITIES:
Obligation under capital leases 209,956 79,563
Notes payable 25,700 36,725
----------- -----------
Total long term liabilities 235,656 116,288
----------- -----------
Total liabilities 1,143,565 655,639
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
50,000,000 shares authorized,
12,373,397 issued and outstanding 123,734 123,734
Additional paid in capital 7,379,744 7,379,744
Accumulated deficit (5,789,305) (5,627,406)
----------- -----------
Total stockholders' equity 1,714,173 1,876,072
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 2,857,738 $ 2,531,711
=========== ===========
--------------------------------------------------------------------------------
See accompanying notes and accountant's review report
F-3
NEXT GENERATION MEDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2007 2006 2007 2006
Revenues:
Sales, net of discounts $ 1,947,160 $ 1,972,240 $ 6,054,804 $ 6,091,001
Franchise fees -- -- 79,000 89,000
------------ ------------ ------------ ------------
Total revenues 1,947,160 1,972,240 6,133,804 6,180,001
Cost of Goods Sold: 1,403,919 1,538,625 4,496,568 4,675,941
------------ ------------ ------------ ------------
Gross margin 543,241 433,615 1,637,236 1,504,060
General and administrative expenses 522,179 536,789 1,604,760 1,613,478
Depreciation 57,273 45,000 163,822 135,000
------------ ------------ ------------ ------------
Total operating expenses 579,452 581,789 1,768,582 1,748,478
Gain/(Loss) from operations (36,211) (148,174) (131,346) (244,418)
Other income and (expenses):
Miscellaneous income(expense) -- 24,002 -- 39,445
Interest expense (11,180) (4,746) (30,553) (12,814)
------------ ------------ ------------ ------------
Total other income (expense) (11,180) 19,256 (30,553) 26,631
Net income (47,391) (128,918) (161,899) (217,787)
Gain applicable to common shareholders (47,391) (128,918) (161,899) (217,787)
------------ ------------ ------------ ------------
Basic gain/(loss) per common share -0.004 -0.010 -0.013 -0.018
------------ ------------ ------------ ------------
Weighted average common shares outstanding 12,373,397 12,373,397 12,373,397 12,373,397
------------ ------------ ------------ ------------
Diluted gain per common share N/A N/A N/A N/A
------------ ------------ ------------ ------------
Fully diluted common shares outstanding 13,075,547 13,347,342 13,075,547 13,347,342
------------ ------------ ------------ ------------
---------------------------------------------------------------------------------------------------------------------
See accompanying notes and accountant's review report
F-4
NEXT GENERATION MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-UNAUDITED
-------------------------------------------------------------------------------------------------
Common Stock Additional
--------------------------------------- Paid In Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
Balance: December 31, 2006 12,373,397 123,734 7,379,744 (5,627,406) $ 1,876,072
Shares issued -- -- -- -- $ --
Net Income -- -- -- 11,119 11,119
----------- ----------- ----------- ----------- -----------
Balance: March 31, 2007 12,373,397 123,734 7,379,744 (5,616,287) $ 1,887,191
Shares issued -- -- -- -- $ --
Net Loss -- -- -- (125,627) (125,627)
----------- ----------- ----------- ----------- -----------
Balance June 30 2007 12,373,397 123,734 7,379,744 (5,741,914) $ 1,761,564
Shares issued -- -- -- -- $ --
Net Loss -- -- -- (47,391) (47,391)
----------- ----------- ----------- ----------- -----------
Balance September 30 2007 12,373,397 123,734 7,379,744 (5,789,305) $ 1,714,173
-------------------------------------------------------------------------------------------------
See accompanying notes and accountant's review report
F-5
NEXT GENERATION MEDIA CORPORATION
STATEMENT OF CASH FLOWS - UNAUDITED
FOR THE NINE MONTHS ENDED
-----------------------------------------------------------------------------------
September 30, September 30,
2007 2006
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (161,899) $ (217,787)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 163,822 134,999
(Increase) decrease in assets
Accounts & notes receivable (291,823) (137,283)
Inventories 24,994 (23,775)
Prepaids and other current assets (45,215) (24,500)
Deposits -- 41,200
Employee loans 1,758 --
Increase (decrease) in liabilities
Accounts and other payables 181,756 (43,547)
Deferred rent 63,298 --
Deferred revenue 26,133 --
Customer deposits -- 186,455
------------- -------------
Net cash flows (used) by
operating activities (37,176) (84,238)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Dynatech, LLC (1,750) --
Purchase of property and equipment, net (147,651) (101,166)
------------- -------------
Net cash provided/(used) by investing
activities (149,401) (101,166)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under Capital leases 236,941 53,524
Line of Credit 50,000 --
Repayment of capital leases (51,373) (24,808)
Repayment of notes payable (18,829) (17,659)
------------- -------------
Net cash provided/(used) by financing
activities 216,739 11,057
------------- -------------
-----------------------------------------------------------------------------------
See accompanying notes and accountant's review report
F-6
NEXT GENERATION MEDIA CORPORATION
STATEMENT OF CASH FLOWS - UNAUDITED (CONTINUED)
FOR THE SIX MONTHS ENDED
-----------------------------------------------------------------------------------
2007 2006
------------- -------------
NET INCREASE/(DECREASE) IN CASH 30,162 (174,347)
CASH, BEGINNING OF PERIOD 181,196 610,885
------------- -------------
CASH, END OF PERIOD $ 211,358 $ 436,538
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Income taxes -- --
Interest 30,553 12,814
-----------------------------------------------------------------------------------
See accompanying notes and accountant's review report
F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
--------------------------------------
The accompanying unaudited interim consolidated financial statements included
herein have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC). The interim condensed consolidated
accounts of Next Generation Media Corporation and its subsidiary (collectively,
the Company). In the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary for a fair statement of the financial
position, results of operations and cash flows for the interim periods presented
have been made. The preparation of the financial statements includes estimates
that are used when accounting for revenues, allowance for uncollectible
receivables, telecommunications expense, depreciation and amortization and
certain accruals. Actual results could differ from those estimates. The results
of operations for the nine months ended September 30, 2007, are not necessarily
indicative of the results to be expected for the full year. Some information and
footnote disclosures normally included in financial statements or notes thereto
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules and regulations. The Company
believes, however, that its disclosures are adequate to make the information
provided not misleading.
The balance sheet at December 31, 2006 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant Company and Subsidiaries' annual
report on Form 10-KSB for the year ended December 31, 2006.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
NATURE OF BUSINESS:
-------------------
Next Generation Media Corporation was incorporated in the State of Nevada in
November of 1980 as Micro Tech Industries Inc., with an official name change to
Next Generation Media Corporation in April of 1997. The Company, through its
wholly owned subsidiary, United Marketing Solutions, Inc., provides direct
marketing products, which involves the designing, printing, packaging, and
mailing of public relations and marketing materials and coupons for retailers
who provide services. Sales are conducted through a network of franchises that
the Company supports on a wholesale basis. At September 30, 2007, the Company
had approximately 32 active area franchise operations located throughout the
United States.
PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment are stated at cost. The company uses the straight-line
method in computing depreciation for financial statement purposes.
F-8
Expenditures for repairs and maintenance are charged to income, and renewals and
replacements are capitalized. When assets are retired or otherwise disposed of,
the cost of the assets and the related accumulated depreciation are removed from
the accounts.
Estimated useful lives are as follows:
Furniture, fixtures and equipment 7-10 years
Leasehold improvements 10 years
Vehicles 5 years
Computer equipment & software 5 years
Depreciation expense for the nine months ended September 30, 2007 and 2006 was
$163,822 and $135,000, respectively.
INTANGIBLES:
------------
The Company has recorded goodwill based on the difference between the cost and
the fair value of certain purchased assets. The Company annually evaluates the
goodwill for possible impairment. The analysis consists of a comparison of the
Company's market capitalization under SFAS No. 142 to the net fair market value
of all identifiable assets plus goodwill and/or projected cash flows to the
carrying value of the goodwill. Any excess book value over market capitalization
would be written off due to impairment.
ADVERTISING EXPENSE:
--------------------
The Company expenses the cost of advertising and promotions as incurred.
Advertising costs charged to operations for the three months ended September 30,
2007 and 2006 was $63,328 and $78,603.
REVENUE RECOGNITION:
--------------------
The Company recognizes revenue from the design production and printing of
coupons upon delivery. Revenue from initial franchise fees is recognized when
substantially all services or conditions relating to the sale have been
substantially performed. Substantially all services and conditions are performed
upon payment of the fee. Initial franchise fees are a one-time fee charged per
franchise license agreement. The initial franchise fees are non-refundable.
Franchise support of $150 per quarter per franchise and other fees are
recognized when billed to the franchisee. Amounts billed or collected in advance
of final delivery or shipments are reported as deferred revenue.
IMPAIRMENT OF LONG-LIVED ASSETS:
--------------------------------
The Company reviews the carrying values of its long-lived assets for possible
impairment on an annual basis and whenever events or changes in circumstances
indicate that the carrying amount of the assets should be addressed. The Company
believes that no permanent impairment in the carrying value of long-lived assets
exists as of September 30, 2007.
COMPREHENSIVE INCOME:
---------------------
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income". Comprehensive income as defined includes all
changes to equity except that resulting from investments by owners and
distributions to owners. The company has no items of comprehensive income to
report.
F-9
RECLASSIFICATIONS:
------------------
Certain prior period amounts have been reclassified to conform to the current
period presentation.
NEW ACCOUNTING PRONOUNCEMENTS:
------------------------------
On December 15, 2004, the Financial Accounting Standards Board issued SFAS No.
123(R), Share-Based Payment, which amends SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No 123 (R) requires that all share-based payments
to employees, including grants of employee stock options, be accounted for at
fair value. The pro forma disclosures previously permitted under SFAS No. 123 no
longer will be an alternative to financial statement recognition. Under SFAS No.
123 (R), the Company must determine the appropriate fair value model to be used
for valuing share-based payments, the amortization method for compensation cost
and the transition method to be used for valuing share-based payments, the
amortization method for compensation cost and the transition method to be used
at date of adoption. The Company previously adopted the fair-value-based method
of accounting for share-based payments under SFAS No. 123 effective January 1,
2003 using the prospective method described in SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. SFAS No. 123 (R) also amends
SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be
reported as a financing cash inflow rather than as a reduction of taxes paid. As
originally issued, SFAS No. 95 required all income tax payments to be classified
as operating cash outflows. This statement is effective for fiscal periods
beginning after June 15, 2005. The adoption of SFAS No. 123 (R) had no material
effect on the financial position or results of operation.
FIN48 In July 2006, the FASB issued FASB Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES (FIN 48). FIN 48 clarifies the accounting for income
taxes be prescribing a minimum probability threshold that a tax position must
meet before a financial statement benefit is recognized. The minimum threshold
is defined in FIN 48 as a tax position that is more likely than not to be
sustained upon examination by the applicable taxing authority, including
resolution of any related appeals or litigation processes, based on the
technical merits of the position. The tax benefit to be recognized is measured
as the largest amount of benefit realized upon ultimate settlement. FIN 48 must
be applied to all existing tax positions upon initial adoption. The cumulative
effect of applying FIN 48 at adoption, if any, is to be reported as an
adjustment to opening retained earnings for the year of adoption. FIN 48 is
effective for the Company's 2008 fiscal year, although early adoption is
permitted. The Company is currently assessing the potential effect of FIN 48 on
its financial statements.
SFAS 157 In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, FAIR VALUE MEASUREMENTS (FASB 157). SFAS 157 provides a
common definition of fair value in generally accepted accounting principles more
consistent and comparable. SFAS 157 also requires expanded disclosures to
provide information about the extent to which fair value is used to measure
assets and liabilities, the methods and assumptions used to measure fair value,
and the effect of fair value measures on earnings. SFAS 157 is effective for the
Company's 2009 fiscal year, although early adoption is permitted. The Company is
currently assessing the potential effect of SFAS 157 on its financial
statements.
F-10
USE OF ESTIMATES:
-----------------
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES:
-------------
The Corporation uses Statement of Financial Standards No. 109 Accounting for
Income Taxes (SFAS No. 109) in reporting deferred income taxes. SFAS No. 109
requires a company to recognize deferred tax liabilities and assets for expected
future income tax consequences of events that have been recognized in the
company's financial statements. Under this method, deferred tax assets and
liabilities are determined based on temporary differences in financial carrying
amounts and the tax bases of assets and liabilities using enacted tax rates in
effect in the years in which temporary differences are expected to reverse.
RISKS AND UNCERTAINTIES:
------------------------
The Company operates in an environment where intense competition exists from
other companies. This competition, along with increases in the price of paper,
can impact the pricing and profitability of the Company.
CREDIT RISK:
------------
The Company at times may have cash deposits in excess of federally insured
limits.
ACCOUNTS RECEIVABLE:
--------------------
The Corporation grants credit to its customers, which includes the retail sector
and their own franchisees. The Company establishes an allowance for doubtful
accounts based upon on a percentage of accounts receivable plus those balances
the Company feels will be uncollectible. Allowance for uncollectible accounts as
of September 30, 2007 and 2006 was $25,255 and $21,651, respectively.
CASH AND CASH EQUIVALENTS:
--------------------------
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents.
F-11
EARNINGS PER COMMON SHARE:
--------------------------
The Company calculates its earnings per share pursuant to Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). Under SFAS
No. 128, basic earnings per share is computed by dividing reported earnings
available to common stockholders by weighted average shares outstanding. Diluted
earnings per share reflect the potential dilution assuming the issuance of
common shares for all potential dilutive common shares outstanding during the
period. As a result of the Company's net losses, all potentially dilutive
securities including warrants and stock options, would be anti-dilutive and
thus, excluded from diluted earnings per share.
As of September 30, 2007, the Company had financial obligations that could
create future dilution to the Company's common shareholders and are not
currently classified as common shares of the company. The following table
details such instruments and obligations and the common stock comparative for
each. The common stock number is based on specific conversion or issuance
assumptions pursuant to the corresponding terms of each individual instrument or
obligation.
Instrument or Obligation
------------------------
Stock options outstanding as of September 30, 2007 with a weighted average
exercise price per share
of $0.57 1,131,500
Inventories:
------------
Inventories consist primarily of paper, envelopes, and printing materials and
are stated at the lower of cost or market, with cost determined on the first-in,
first-out method.
Principles of Consolidation:
----------------------------
The accompanying consolidated financial statements include the accounts of the
parent company, Next Generation Media Corporation and its subsidiary as of
September 30, 2007.
NOTE 2 - RETIREMENT PLAN
------------------------
The company maintains a 401(k) defined contribution plan covering substantially
all employees. The Corporation may elect to contribute up to 3% of each eligible
employee's gross wages. Employees can elect up to 15% of their salary to be
contributed before income taxes, up to the annual limit set by the Internal
Revenue Code. The company accrued a matching contribution for the quarter ended
September 30, 2007 of $9,000.
F-12
NOTE 3 - NOTES PAYABLE
----------------------
Notes payable at September 30, 2007 consists of:
Obligation to Bank of America, bearing interest at 6.4% percent per
annum, the loan is payable in forty-eight monthly installments of
$2,395, including interest, and is collateralized by the equipment
financed. Balance outstanding at September 30, 2007 was $43,213.
The 5 year schedule of maturities is as follows:
2007 6,128
2008 27,011
2009 10,074
Thereafter 0
--------
$ 43,213
========
NOTE 4 - COMMON STOCK
---------------------
During the nine months ended September 30, 2007 and 2006, the Company issued no
shares of common stock.
NOTE 5 - EMPLOYEE STOCK INCENTIVE PLAN
--------------------------------------
On December 26, 2001, the Company adopted the Employee Stock Incentive Plan
authorizing 3,000,000 shares at a maximum offering price of $0.10 per share for
the purpose of providing employees equity-based compensation incentives. The
Company issued no shares under the plan during the periods.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
--------------------------------------
The Company acquired machinery under the provisions of long-term leases. For
financial reporting purposes, minimum lease payments relating to the machinery
have been capitalized.
Future minimum annual lease payments for capital and operating leases as of
December 31, 2007 are:
F-13
Operating Capital
--------- -------
2007 73,036 27,366
2008 302,855 99,215
2009 314,969 86,224
2010 327,568 45,740
2011 355,549 33,944
Thereafter 2,104,355 84,859
---------- --------
Total 3,478,332 377,348
========== ========
Rent expense for the period ended September 30, 2007 and 2006 was $208,432 and
$209,779 respectively.
The Company has entered into various employment contracts. The contracts
provided for the award of present and/or future shares of common stock and/or
options to purchase common stock at fair market value of the underlying options
at date of grant or vesting. The contracts can be terminated without cause upon
written notice within thirty to ninety days. The Company is party to various
legal matters encountered in the normal course of business. In the opinion of
management and legal counsel, the resolution of these matters will not have a
material adverse effect on the Company's financial position or the future
results of operations.
NOTE 7- RELATED PARTY TRANSACTIONS
----------------------------------
Related Party Leases and Notes Payables:
----------------------------------------
The Company leases its operating facilities under a ten year lease from a
partnership controlled by the President of United Marketing Solutions.
Minimum future payments to related parties under this lease as of December 31,
2007, as included in the operating leases per Note 6 were:
Years ended
December 31, Amount
------------ ------
2007 67,036
2008 297,985
2009 309,904
2010 322,301
2011 335,193
Thereafter 2,104,355
-----------
Total minimum future payments $ 3,436,774
F-14
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS.
--------------
The following Management Discussion and Analysis should be read in conjunction
with the financial statements and accompanying notes included in this Form
10-QSB. During the three and nine months ended September 30, 2007 the Company
experienced a decrease in total revenues with sales of $1,947,160 and $6,133,804
compared to $1,972,240 and $6,180,001 for the same periods in 2006. An analysis
of September 30, 2007 year-to-date plant data shows the company has produced
advertising 24,614 units as compared to 24,447 units through the same period in
2006. 2007 year-to-date local mailing area insertion averages have increased
from 18.73 to 18.98 during the comparable nine-month period. While core product
sales remained constant, decreases in ancillary product sales, and the network
adjustment or cancellation of scheduled production contributed to the net
decline. The Company continues to offer significant incentive programs designed
to facilitate growth of existing franchises, and will continue to evaluate
staffing requirements and various opportunities to increase the visibility
necessary to achieve additional network growth. For the nine months ended
September 30, 2007 the company increased the production incentives provided to
its franchise network by 35% over the same period in 2006.
Total costs of goods sold in the three-month period ended September 30, 2007
were down 8.7% from the same period in 2006, $1,403,919 compared to $1,538,625.
Cost of goods as a percentage of sales also decreased from 78.0% for the
three-month period ended September 30, 2006 to 72.1% for the three-month period
ended September 30, 2007. While the costs of labor and core raw materials such
as paper, ink and envelopes continue to rise, the Company continues to build
strong relationships with core material vendors in order to contain cost
increases. Cost of goods will fluctuate from quarter to quarter and year to year
based on production workflow and market conditions. These cost fluctuations may
result in the need for rightsizing adjustments to maintain competitive market
position.
Total operating expenses for the three months ended September 30, 2007 decreased
0.4% ($579,452 compared to $581,789) from the same period in 2006. The company
continues to place a strong emphasis on franchise development and the
operations, training & support of its network with expenditures for these vital
components up 13% for the nine months ended September 30, 2007.
Total assets increased from $2,857,738 at September 30, 2007 compared to
$2,413,107 at September 30, 2006 as result of a continuing investment in
workflow software and production equipment. Total current liabilities also
increased from $777,107 at September 30, 2006 to $907,909 at September 30, 2007
due in part to additional short term financing of capitalized assets. The
Company uses credit to manage cash flow and build cash reserves. Finance charges
are avoided by paying outstanding balances in full by due dates.
Net cash flows used by operating activities were ($37,176) for the nine-month
period ended September 30, 2007 as compared to net cash flows used by operating
activities of ($84,238) for the nine-month period ended September 30, 2006.
Net cash used by investing activities was ($149,401) for the nine-month period
ended September 30, 2007, as compared to net cash used by investing activities
of ($101,166) for the nine-month period ended September 30, 2007.
Net cash provided by financing activities was $216,739 for the nine-month period
ended September 30, 2007, as compared to net cash of $11,057 provided by
financing activities for the nine-month period ended September 30, 2006.
3
The Company incurred a net loss of $47,391 for the three months ended September
30, 2007, compared to a loss of $128,918 for the three months ended September
30, 2006. Segment activity resulted in a net profit of $6,405 for the three
months ended September 30, 2007, compared to a loss of $131,073 for the three
months ended September 30, 2006. The results of operations for the three months
ended September 30, 2007 are not necessarily indicative of the results to be
expected for the full year. Despite sub par performance for a three-month period
in the past, the Company has produced annual profits on a regular basis.
While the Company has raised capital to meet its working capital and financing
needs in the past, additional financing may be required in order to meet the
Company's current and projected cash flow requirements. As previously mentioned,
the Company has obtained financing in the forms of equity as well as commercial
financing to provide the necessary working capital. The company currently has no
other commitments for financing. There are no assurances the Company will be
successful in acquiring additional financing.
The Company has issued shares of its common stock from time to time in the past
to satisfy certain obligations, and expects in the future to also acquire
certain services, satisfy indebtedness, and/or make acquisitions utilizing
authorized shares of the capital stock of the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, operations of the Company may be exposed to
fluctuations in interest rates. These fluctuations can vary the cost of
financing, investing, and operating transactions. Because the Company has only
fixed rate short-term debt, there are no material impacts on earnings due to
fluctuations in interest rates.
NEW ACCOUNTING PRONOUNCEMENTS:
------------------------------
In March 2004, the FASB issued EITF No. 03-1, THE MEANING OF
OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS which
provides additional guidance on how companies, carrying debt and equity
securities at amounts higher than the securities fair values, evaluate whether
to record a loss on impairment. In addition, EITF No. 03-1 provides guidance on
additional disclosures required about unrealized losses. The impairment
accounting guidance is effective for reporting periods beginning after June 15,
2004 and the disclosure requirements are effective for annual reporting periods
ending after June 15, 2004. On September 30, 2004, the FASB approved the
issuance of FASB Staff Position EITF No. 03-1-1, which delays the effective date
for the application of the recognition and measurement provisions of EITF No.
03-1 to investments in securities that are impaired. Certain disclosure
provisions in EITF No. 03-1 were effective for fiscal years ended after December
15, 2003 and other disclosure provisions are effective for annual reporting
periods after June 15, 2004. The adoption of this statement is not expected to
have a material effect on the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), SHARE-BASED
PAYMENT ("SFAS 123 (R)"). This statement is a revision of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, and supersedes APB Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related implementation
guidance. SFAS 123(R) requires that compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments issued.
This statement is effective beginning with the Company's third quarter of fiscal
year 2005. The Company is currently evaluating the requirements of SDAF 123(R)
and has not yet fully determined the impact on its consolidated financial
statements. The adoption of this statement is not expected to have a material
effect on the Company's consolidated financial statements.
4
FORWARD LOOKING STATEMENTS.
The foregoing Managements Discussion and Analysis of Financial Condition and
Results of Operations "forward looking statements" within the meaning of Rule
175 under the Securities Act of 1933, as amended, and Rule 3b-6 under the
Securities Act of 1934, as amended, including statements regarding, among other
items, the Company's business strategies, continued growth in the Company's
markets, projections, and anticipated trends in the Company's business and the
industry in which it operates. The words "believe," "expect," "anticipate,"
"intends," "forecast," "project," and similar expressions identify
forward-looking statements. These forward- looking statements are based largely
on the Company's expectations and are subject to a number of risks and
uncertainties, including but not limited to, those risks associated with
economic conditions generally and the economy in those areas where the Company
has or expects to have assets and operations; competitive and other factors
affecting the Company's operations, markets, products and services; those risks
associated with the Company's ability to successfully negotiate with certain
customers, risks relating to estimated contract costs, estimated losses on
uncompleted contracts and estimates regarding the percentage of completion of
contracts, associated costs arising out of the Company's activities and the
matters discussed in this report; risks relating to changes in interest rates
and in the availability, cost and terms of financing; risks related to the
performance of financial markets; risks related to changes in domestic laws,
regulations and taxes; risks related to changes in business strategy or
development plans; risks associated with future profitability; and other factors
discussed elsewhere in this report and in documents filed by the Company with
the Securities and Exchange Commission. Many of these factors are beyond the
Company's control. Actual results could differ materially from these
forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the forward-looking information contained in this Form
10-QSB will, in fact, occur. The Company does not undertake any obligation to
revise these forward- looking statements to reflect future events or
circumstances and other factors discussed elsewhere in this report and the
documents filed or to be filed by the Company with the Securities and Exchange
Commission.
INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
TRENDS, RISKS AND UNCERTAINTIES
The Company has sought to identify what it believes to be the most significant
risks to its business as discussed in "Risk Factors" above, but cannot predict
whether or to what extent any of such risks may be realized nor can there be any
assurances that the Company has identified all possible risks that might arise.
Investors should carefully consider all of such risk factors before making an
investment decision with respect to the Company's stock.
Limited operating history; anticipated losses; uncertainly of future results
The Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company's prospects must be
evaluated with a view to the risks encountered by a company in an early stage of
development, particularly in light of the uncertainties relating to the business
model that the Company intends to market and the potential acceptance of the
Company's business model. The Company will be incurring costs to develop,
introduce and enhance its products, to establish marketing relationships, to
acquire and develop products that will complement each other, and to build an
administrative organization. To the extent that such expenses are not
subsequently followed by commensurate revenues, the Company's business, results
of operations and financial condition will be materially adversely affected.
There can be no assurance that the Company will be able to generate sufficient
revenues from the sale of its products and services. The Company expects that
negative cash flow from operations may exist for the next 12 months as it
continues to develop and market its products and services. If cash generated by
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may be required to sell additional equity or debt securities. The sale
of additional equity or convertible debt securities would result in additional
dilution to the Company's shareholders.
5
Potential fluctuations in quarterly operating results may fluctuate
Significantly in the future as a result of a variety of factors, most of which
Are outside the Company's control including: the demand for the Company's
products and services; seasonal trends in demand and pricing of products and
services; the amount and timing of capital expenditures and other costs relating
to the expansion of the Company's operations; the introduction of new services
and products by the Company or its competitors; price competition or pricing
changes in the industry; political risks and uncertainties involving the world's
markets; technical difficulties and general economic conditions. The Company's
quarterly results may also be significantly affected by the impact of the
accounting treatment of acquisitions, financing transactions or other matters.
Particularly the Company's early stage of development, such accounting treatment
can have a material impact on the results for any quarter. Due to the foregoing
factors, among others, it is likely that the Company's operating results will
fall below the expectations of the Company or investors in some future quarter.
MANAGEMENT OF GROWTH
The Company may experience growth in the number of employees relative to its
current levels of employment and the scope of its operations. In particular, the
Company may need to hire sales, marketing and administrative personnel.
Additionally, acquisitions could result in an increase in employee headcount and
business activity. Such activities could result in increased responsibilities
for management. The Company believes that its ability to increase its customer
support capability and to attract, train, and retain qualified technical, sales,
marketing, and management personnel, will be a critical factor to its future
success. In particular, the availability of qualified sales and management
personnel is quite limited, and competition among companies to attract and
retain such personnel is intense. During strong business cycles, the Company may
experience difficulty in filling its needs for qualified sales, and other
personnel.
The Company's future success will be highly dependent upon its ability to
successfully manage the expansion of its operations. The Company's ability to
manage and support its growth effectively will be substantially dependent on its
ability to implement adequate financial and management controls, reporting
systems, and other procedures and hire sufficient numbers of financial,
accounting, administrative, and management personnel. The Company is in the
process of establishing and upgrading its financial accounting and procedures.
There can be no assurance that the Company will be able to identify, attract,
and retain experienced accounting and financial personnel. The Company's future
operating results will depend on the ability of its management and other key
employees to implement and improve its systems for operations, financial
control, and information management, and to recruit, train, and manage its
employee base. There can be no assurance that the Company will be able to
achieve or manage any such growth successfully or to implement and maintain
adequate financial and management controls and procedures, and any inability to
do so would have a material adverse effect on the Company's business, results of
operations, and financial condition.
The Company's future success depends upon its ability to address potential
market opportunities while managing its expenses to match its ability to finance
its operations. This need to manage its expenses will place a significant strain
on the Company's management and operational resources. If the Company is unable
to manage its expenses effectively, the Company's business, results of
operations, and financial condition will be materially adversely affected.
RISKS ASSOCIATED WITH ACQUISITIONS
Although the Company does not presently intend to do so, as part of its business
strategy in the future, the Company could acquire assets and businesses relating
to or complementary to its operations. Any acquisitions by the Company would
involve risks commonly encountered in acquisitions of companies. These risks
would include, among other things, the following: the Company could be exposed
to unknown liabilities of the acquired companies; the Company could incur
acquisition costs and expenses higher than it anticipated; fluctuations in the
Company's quarterly and annual operating results could occur due to the costs
and expenses of acquiring and integrating new businesses or technologies; the
Company could experience difficulties and expenses in assimilating the
operations and personnel of the acquired businesses; the Company's ongoing
business could be disrupted and its management's time and attention diverted;
the Company could be unable to integrate successfully.
6
ITEM 3. CONTROLS AND PROCEDURES
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as
amended) that are designed to ensure that information required to be disclosed
in our periodic reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to management,
including the Company's principal executive officer and principal financial
officer, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, management carried out an
evaluation, under the supervision and with the participation of the Company's
principal executive officer and principal financial officer, of the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Exchange Act). Based upon the evaluation, the Company's
principal executive/financial officer concluded that its disclosure controls and
procedures were effective at a reasonable assurance level to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms. In
addition, the Company's principal executive officer and principal financial
officer concluded that its disclosure controls and procedures were effective at
a reasonable assurance level to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company's management, including its
principal executive officer and principal financial officer, to allow timely
decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, will be or have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, and/or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving our stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions,
and/or the degree of compliance with the policies and procedures may
deteriorate. Because of the inherent limitations in a cost-effective internal
control system, misstatements due to error or fraud may occur and not be
detected.
Changes in Disclosure Controls and Procedures.
There were no changes in the Company's disclosure controls and procedures, or in
factors that could significantly affect those controls and procedures since
their most recent evaluation.
PART II.
ITEM 1. LEGAL PROCEEDINGS.
Other than as set forth below, the Registrant is not a party to any material
pending legal proceedings and, to the best of its knowledge, no such action by
or against the Registrant has been threatened.
The Company is subject to other legal proceedings and claims that arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters will not have material adverse effect on its financial position, results
of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Sales of Unregistered Securities.
Not Applicable.
Use of Proceeds.
Not Applicable.
7
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were not any matters submitted requiring a vote of security holders during
the three-month period ending September 30, 2007.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Reports on Form 8-K. No reports on Form 8-K were filed during
the three-month period covered in this Form 10-QSB.
(b) Exhibits. Exhibits included or incorporated by reference
herein: See Exhibit Index.
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation, under the name Micro Tech
Industries, Inc. (previously filed).
3.2 Amendment to the Articles of Incorporation (previously filed).
3.3 Amended and Restated Bylaws (previously filed).
10.1 Employment Agreement for Darryl Reed (previously filed).
16.1 Letter on change in certifying accountant (previously filed).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Darryl Reed (filed
herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification of Olin Greene (filed
herewith).
32. Section 1350 Certification of Darryl Reed and Olin Greene
(filed herewith).
8